from pages 5-39 of Stanford's Health Care Report- any particular point that feel may be relevant or interesting in regards to financial status current or future for Stanford. Has to be least 200 words and couple paragrahs

Stanford Health Care (formerly named Stanford Hospital and Clinics) Consolidated Financial Statements August 31, 2014 and 2013 Stanford Health Care Index August 31, 2014 and 2013 Page(s) Independent Auditor's Report ................................................................................................................... 1 Consolidated Financial Statements: Consolidated Balance Sheets .......................................................................................................... 2 Consolidated Statements of Operations and Changes in Net Assets ............................................. 3 Consolidated Statements of Cash Flows ......................................................................................... 4 Notes to Consolidated Financial Statements .............................................................................. 5-39 Independent Auditor's Report To the Board of Directors Stanford Health Care We have audited the accompanying consolidated financial statements of Stanford Health Care (\"SHC\"), which comprise the consolidated balance sheets as of August 31, 2014 and August 31, 2013, and the related consolidated statements of operations and changes in net assets and cash flows for the years then ended. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to SHC's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of SHC's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Stanford Health Care at August 31, 2014 and August 31, 2013, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. December 10, 2014 PricewaterhouseCoopers LLP, Three Embarcadero Center, San Francisco, CA 94111 T: (415) 498 5000, F: (415) 498 7100, www.pwc.com/us 1 Stanford Health Care Consolidated Balance Sheets August 31, 2014 and 2013 (in thousands of dollars) 2014 Assets Current assets: Cash and cash equivalents $ Short term investments Patient accounts receivable, net of allowance for doubtful accounts of $115,000 and $98,000 at August 31, 2014 and 2013, respectively Other receivables Inventories Prepaid expenses and other Total current liabilities Self-insurance reserves and other, net of current portion Other long-term liabilities Pension liability Long-term debt, net of current portion Total liabilities Net assets: Unrestricted: Stanford Health Care Noncontrolling interests Total unrestricted Temporarily restricted Permanently restricted Total net assets Total liabilities and net assets 448,831 49,636 378,916 45,700 24,286 24,532 1,082,595 971,901 120,866 1,383,385 491,594 1,405,862 263,766 125,380 1,181,895 531,444 1,143,478 313,477 $ 4,748,068 $ 4,267,575 $ $ Investments Investments in University managed pools Assets limited as to use, held by trustee, net of current portion Property and equipment, net Other assets Liabilities and Net Assets Current liabilities: Accounts payable and accrued liabilities Accrued salaries and related benefits Due to related parties Third-party payor settlements Current portion of long-term debt Debt subject to short-term remarketing arrangements Self-insurance reserves and other $ 431,897 28,416 25,374 28,283 Total current assets Total assets 467,655 100,970 2013 173,160 161,494 62,106 22,334 11,700 228,200 27,296 174,111 135,841 48,628 13,515 12,654 228,200 24,493 686,290 637,442 105,270 170,565 30,827 1,067,799 102,043 148,842 41,851 1,082,282 2,060,751 2,012,460 2,137,389 23,304 2,160,693 518,932 7,692 1,757,504 19,453 1,776,957 470,567 7,591 2,687,317 2,255,115 $ 4,748,068 $ 4,267,575 The accompanying notes are an integral part of these consolidated financial statements. 2 Stanford Health Care Consolidated Statements of Operations and Changes in Net Assets Years Ended August 31, 2014 and 2013 (in thousands of dollars) Operating revenues: Net patient service revenue Provision for doubtful accounts Net patient service revenue less provision for doubtful accounts Premium revenue Other revenue Net assets released from restrictions used for operations Total operating revenues Operating expenses: Salaries and benefits Professional services Supplies Purchased services Depreciation and amortization Interest Other Expense recoveries from related parties Total operating expenses Income from operations Interest and investment income Increase in value of University managed pools Interest rate swaps mark to market adjustments Loss on extinguishment of swaps Excess of revenues over expenses Other changes in unrestricted net assets: Transfer to Stanford University, net Transfer from Lucile Salter Packard Children's Hospital Change in net unrealized gains on investments Net assets released from restrictions used for: Purchase of property and equipment Change in pension and postretirement liability Noncontrolling capital distribution, net Increase in unrestricted net assets 2014 2013 $ 2,980,067 (140,678) $ 2,679,365 (115,762) 2,839,389 60,047 94,248 4,639 2,563,603 63,429 82,992 3,761 2,998,323 2,713,785 1,232,251 37,046 421,899 741,565 100,625 43,636 226,475 (83,422) 1,105,761 33,921 374,847 661,961 94,080 46,799 221,611 (77,975) 2,720,075 2,461,005 278,248 252,780 15,199 176,014 (37,532) (71) 13,072 103,329 102,928 - 431,858 472,109 (54,337) 691 (6,978) 8,000 (1,116) 356 6,650 (1,482) 8,594 30,119 (289) 383,736 Changes in temporarily restricted net assets: Transfer from Stanford University Contributions and other Investment (loss) income Gains on University managed pools Net assets released from restrictions for: Operations Purchase of property and equipment Increase in temporarily restricted net assets Changes in permanently restricted net assets: Contributions Increase in permanently restricted net assets Increase in net assets 2,480 48,108 (103) 2,875 145 51,940 545 2,271 (4,639) (356) (3,761) (8,594) 48,365 42,546 101 - 101 - 432,202 Net assets, beginning of year Net assets, end of year 510,439 552,985 2,255,115 1,702,130 $ 2,687,317 $ 2,255,115 The accompanying notes are an integral part of these consolidated financial statements. 3 Stanford Health Care Consolidated Statements of Cash Flows Years Ended August 31, 2014 and 2013 (in thousands of dollars) Cash flows from operating activities: Increase in net assets Adjustments to reconcile increase in net assets to net cash provided by operating activities: Noncontrolling interests in subsidiaries Loss on extinguishment of swaps Depreciation and amortization Provision for doubtful accounts Change in fair value of interest rate swaps Increase in value of University managed pools Unrealized gains on investments Realized gains on investments Contributions received for long lived assets or endowment and net equity transfers to/from related parties Changes in operating assets and liabilities: Patient accounts receivable Due to related parties Other receivables, inventory, other assets, prepaid expenses and other Accounts payable, accrued liabilities and pension liabilities Accrued salaries and related benefits Third-party payor settlements Self-insurance reserves Cash provided by operating activities 2014 2013 $ 432,202 $ 552,985 Cash flows from investing activities: Purchases of investments Sales of investments Purchases of investments in University managed pools Sales of investments in University managed pools Decrease (increase) in assets limited as to use and other Purchases of property and equipment Cash used in investing activities Cash flows from financing activities: Payment of long-term debt and capital lease obligations Contributions received for long lived assets or endowment and net equity transfers to/from related parties Cash provided by financing activities Net increase (decrease) in cash and cash equivalents Supplemental disclosures of cash flow information: Interest paid Supplemental disclosures of non cash information: Donated securities Payables for property and equipment Equity transfers (to) from related parties, net (4,241) 91,992 115,762 (102,928) (103,329) (106) (35) 23,156 (46,367) (193,659) (6,059) 9,201 (34,222) 25,653 8,819 6,030 366,529 (169,749) 15,893 19,478 (33,349) 17,653 (11,028) (4,072) 338,559 (148,902) 102,784 (1,473) 1,676 39,850 (352,747) (144,849) 53,012 (106,544) 636 (1,837) (246,473) (358,812) (446,055) (12,710) (10,793) 23,817 58,001 11,107 47,208 18,824 Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year (3,851) 71 98,634 140,678 37,532 (176,014) (1,632) (10) (60,288) 448,831 509,119 $ 467,655 $ 448,831 $ 46,227 $ 49,692 $ 24,739 9,905 (19,021) $ 19,825 1,800 The accompanying notes are an integral part of these consolidated financial statements. 4 Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars) 1. Organization In October 2014, Stanford Hospital and Clinics was renamed as Stanford Health Care (\"SHC\") to reflect the range and focus of our organization and our commitment to healing humanity through science and compassion, one patient at a time. SHC operates a licensed acute care hospital (\"Stanford Hospital\") and a cancer center in Palo Alto, California, along with numerous outpatient physician clinics in the San Francisco Bay Area, in community settings, and in association with regional hospitals. Stanford Hospital is a principal teaching affiliate of the Stanford University School of Medicine (\"SoM\") and provides primary and specialty health services to adults, including cardiac care, cancer treatment, solid organ transplantation services, neurosciences, and orthopedics services designated by management as SHC's \"Strategic Clinical Services\". SHC, together with Lucile Salter Packard Children's Hospital at Stanford (\"LPCH\"), operates the clinical settings through which the SoM educates medical and graduate students, trains residents and clinical fellows, supports faculty and community clinicians and conducts medical and biological sciences research. The Board of Trustees of Leland Stanford Junior University (the \"University\") is the sole corporate member of SHC and LPCH. As part of their ongoing operations, SHC and LPCH engage in certain related party transactions as described further in Note 14. The consolidated financial statements include SHC's interest in University HealthCare Alliance (\"UHA\"), Stanford Emanuel Radiation Oncology Center, LLC (\"SEROC\"), CareCounsel, LLC (\"CareCounsel\"), SUMIT Holding International, LLC (\"SHI\"), Professional Exchange Assurance Company (\"PEAC\") and University HealthCare Advantage (\"HealthCare Advantage\"). UHA, a physician practice management organization, supports Stanford University Medical Center's mission of delivering quality care to the community and conducting research and education. In addition, UHA leads the development of a high quality clinical delivery network, built on collaboration with and sponsorship of community hospitals, on behalf of the SoM, SHC, and UHA physicians. The SoM and SHC are the members of UHA, and appoint directors to the governing board. Effective January 1, 2011, SHC entered into a sponsorship agreement with UHA; whereby, SHC agreed to certain funding for the development and operation of UHA and continued additional funding for future or alternative clinical sites of UHA. Additional funding by SHC to UHA for operations and capital was $33,715 and $30,666 for the years ending August 31, 2014 and 2013, respectively. In fiscal year 2012, the bylaws of UHA were amended and restated and the resulting effect afforded control of UHA to SHC; therefore, the activities of UHA have been consolidated in the 2013 and 2014 financial statements of SHC. SEROC is a joint venture between SHC and Emanuel Medical Center (\"EMC\"), prior to July 31, 2014. As of that date, EMC transferred its entire membership interest in SEROC to Doctors Medical Center of Modesto, Inc. (\"DMC\"). SEROC operates an outpatient clinic that provides radiation oncology services to patients in Turlock, California and surrounding communities. SHC's interest in SEROC was 60% for the years ended August 31, 2014 and 2013. The remaining interest of 40% is recorded as a noncontrolling interest in unrestricted net assets on the consolidated balance sheets as of August 31, 2014 and 2013. CareCounsel, a leading provider of employer-sponsored health advocacy and health care assistance services, was acquired by SHC effective July 18, 2012. The Bay Area company was founded in 1996 with a mission to help employees, retirees and their families navigate the complex health care environment through an employer-sponsored benefit that provides consumer education, advocacy and access to expert health care resources and information. SHI is the sole owner of SUMIT Insurance Company Ltd. (\"SUMIT\") and Stanford University Medical Network Risk Authority, LLC (\"SRA\"). SHC and LPCH are the owners of SHI. 5 Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars) 1. Organization (Continued) SHC's share of net assets in SUMIT, a captive insurance carrier, was 73.2% and 74.9% for the years ended August 31, 2014 and 2013, respectively. LPCH's share of net assets in SUMIT was 26.8% and 25.1% for the years ended August 31, 2014 and 2013, respectively, and is recorded as a noncontrolling interest in unrestricted net assets on the consolidated balance sheets. SRA was formed on September 19, 2012 and began operations on December 1, 2012. SRA provides risk management services to SHI, the owners of SHI and other affiliated and unaffiliated parties and serves as attorney-in-fact to PEAC. SHC's share of net assets in SRA was 82% for the years ended August 31, 2014 and 2013. The remaining interest of 18% is recorded as a noncontrolling interest in unrestricted net assets on the consolidated balance sheets as of August 31, 2014 and 2013. PEAC, a captive insurance carrier, provides insurance coverage to UHA, Packard Children's Health Alliance and other affiliated parties. SHC's share of net assets in PEAC was 74.7% and 79.6% for the years ended August 31, 2014 and 2013, respectively. The remaining interest of 25.3% and 20.4% for the years ended August 31, 2014 and 2013, respectively, is recorded as a noncontrolling interest in unrestricted net assets on the consolidated balance sheets. HealthCare Advantage, a non-profit public benefit corporation, provides comprehensive healthcare coverage options to elderly and disabled eligible Medicare populations of Santa Clara County through their Medicare Advantage Plan and is solely owned by SHC. This service will be offered to Medicare-eligible residents of Santa Clara County effective January 1, 2015. 2. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of SHC and its subsidiaries, UHA, SEROC, CareCounsel, SHI, PEAC and HealthCare Advantage which are controlled and owned more than 50% by SHC. All significant inter-company accounts and transactions are eliminated in the consolidation. Basis of Presentation The accompanying consolidated financial statements are prepared on the accrual basis of accounting. Net assets of SHC and changes therein have been classified and are reported as follows: Unrestricted net assets Unrestricted net assets represent those resources of SHC that are not subject to donor-imposed stipulations. The only limits on unrestricted net assets are broad limits resulting from the nature of SHC and the purposes specified in its articles of incorporation or bylaws and, limits resulting from contractual agreements, if any. Temporarily restricted net assets Temporarily restricted net assets represent contributions, which are subject to donor-imposed restrictions that can be fulfilled by actions of SHC pursuant to those stipulations or by the passage of time. Permanently restricted net assets Permanently restricted net assets represent contributions that are subject to donor-imposed restrictions that they be maintained permanently by SHC. Generally, the donors of these assets permit SHC to use all or part of the investment return on these assets. 6 Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars) 2. Summary of Significant Accounting Policies (Continued) Basis of Presentation (continued) Expenses are generally reported as decreases in unrestricted net assets. A restriction expires when the stipulated time period has elapsed, when the stipulated purpose for which the resource was restricted has been fulfilled, or both. Temporarily restricted contributions are recorded as restricted revenue when received and when the restriction expires, the net assets are shown as released from restriction on the consolidated statements of operations and changes in net assets. Investment income on temporarily or permanently restricted assets that is restricted by donor or law is recorded within the respective net asset category, and when the restriction expires, the net assets are shown as released from restriction. Cash and Cash Equivalents Cash and cash equivalents include certain investments in highly liquid debt instruments with original maturities of three months or less. Cash equivalents consist primarily of demand deposits and money market mutual funds. Assets Limited as to Use, Held by Trustee Assets limited as to use include various accounts held by a trustee in accordance with indenture requirements. The indenture terms require that the trustee control the expenditure of bond proceeds for capital projects. Assets limited as to use consist of cash and cash equivalents and short-term investments, recorded at cost, which approximates fair value. There are no amounts required to fund current liabilities of SHC, therefore the entire amount has been classified as longterm in the consolidated balance sheets at August 31, 2014 and 2013. Inventories Inventories, which consist primarily of hospital operating supplies and pharmaceuticals, are stated at the lower of cost or market value determined using the first-in, first-out method. Investments Investments held directly by SHC consist of cash and cash equivalents and mutual funds and are stated at fair value. Fair value is determined in accordance with current accounting guidance as further described in Note 8. Investment earnings (including realized gains and losses on investments, interest, dividends and impairment loss on investment securities) are included in investment income unless the income or loss is restricted by donor or law. Income on investments of donor restricted funds is added to or deducted from the appropriate net asset category based on the donor's restriction. Unrestricted unrealized gains and losses on other than trading securities are separately reported below the excess of revenues over expenses. Investments in University Managed Pools Investments in University managed pools consist of funds invested in the University's Merged Pool (\"MP\") and Expendable Funds Pool (\"EFP\") (collectively the \"Pools\"). Under the terms of SHC's agreement with the University, the University has discretion to invest the funds in the Pools. SHC may deposit funds in the Pools at its discretion. Withdrawals from the MP and EFP require advance notice to the University. SHC accounts for its share of the Pools in accordance with current accounting guidance. The value of its share of the Pools is determined by the University and is based on the fair value of the underlying assets in the Pools. The University allocates investment earnings to SHC from the University managed pools based on SHC's share of the Pools. Earnings include interest, dividends, distributions, investment gains and losses, and the increases or decreases in the value of SHC's share of the pools. In accordance with current accounting guidance, all investment gains and losses and increases and decreases in share value are treated as realized and included in the excess of revenues over expenses. 7 Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars) 2. Summary of Significant Accounting Policies (Continued) Investments in University Managed Pools (continued) The increases or decreases in the value of SHC's share of the Pools are recorded as income and gains on University managed pools unless the income is restricted by donor or law. Income on investments of donor restricted funds invested in the University managed pools is added to or deducted from the appropriate net asset category based on the donor's restriction. Property and Equipment Property and equipment are stated at cost except for donated assets, which are recorded at fair market value at the date of donation. Depreciation and amortization of property and equipment is provided using the straight-line method over the estimated useful lives of the assets, which are as follows: Land improvements Buildings and improvements Equipment 10 to 25 years 7 to 40 years 3 to 20 years Significant replacements and improvements are capitalized, while maintenance and repairs, which do not improve or extend the life of the respective assets, are charged to expense as incurred. Upon sale or disposal of property and equipment, the cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in the consolidated statements of operations and changes in net assets. Equipment includes medical equipment, furniture and fixtures and computer software and hardware. Equipment under capital leases is recorded at present value at the inception of the leases and is amortized on the straight-line method over the shorter of the lease term or the estimated useful life of the equipment. The amortization of the assets recorded under capital leases is included in depreciation and amortization expense in the accompanying consolidated statements of operations and changes in net assets. Interest costs incurred on borrowed funds during the period of construction of capital assets is capitalized, net of any interest earned, as a component of the cost of acquiring those assets. Asset Retirement Obligations Asset retirement obligations (\"ARO\") are legal obligations associated with the retirement of longlived assets. These liabilities are initially recorded at fair value as other long-term liabilities and the related asset retirement costs are capitalized by increasing the carrying amount of the related assets by the same amount as the liability. Asset retirement costs are subsequently accreted over the useful lives of the related assets. SHC recorded current period accretion expense of $367 and $350 in the consolidated statements of operations and changes in net assets for the years ended August 31, 2014 and 2013, respectively. ARO liability of $7,133 and $7,772 is included in other long-term liabilities on the consolidated balance sheets as of August 31, 2014 and 2013, respectively. Other Assets Other assets include deferred financing costs, long-term portion of contributions receivable, investments in Stanford PET-CT, LLC (\"PET-CT\"), intangible assets and other long-term assets. Deferred financing costs represent costs incurred in conjunction with the issuance of SHC's longterm debt. These costs are amortized on a straight-line basis, which approximates the effective interest method, over the life of the debt. 8 Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars) 2. Summary of Significant Accounting Policies (Continued) Other Assets (continued) PET-CT is a California limited liability company which provides radiological services to patients of the community, including patients served by SHC and physicians affiliated with the SoM. SHC and the University each appoint one-half of the members of the governing board of PET-CT and are its only members. SHC's interest in PET-CT was 50% for the years ended August 31, 2014 and 2013. As SHC has 50% ownership and does not have control, these investments are recorded using the equity method. Contributions Receivable Unconditional promises to give (\"contributions\") are recorded at fair value at the date the promise is received. Donations for specific purposes are reported as either temporarily or permanently restricted net assets. Contributions to be received after one year are discounted at an appropriate discount rate commensurate with the risks involved and applicable to the years in which the promises are received, and recorded in their respective net asset category. In accordance with current accounting guidance, the discount rates were determined using the risk free rate adjusted for the risk of donor default. Amortization of the discount is included in contributions and other in the consolidated statements of operations and changes in net assets. Conditional promises to give are recognized when the condition is substantially met. Premiums and Discounts on Long-Term Debt Premiums and discounts arising from the original issuance of long-term debt are amortized on either the effective interest method or the straight-line basis, which approximates the effective interest method, over the life of the debt. The unamortized portion of these premiums and discounts are included in long-term debt on the consolidated balance sheets. Interest Rate Swap Agreements SHC has entered into several interest rate swap agreements, also known as risk management or derivative instruments, to reduce the effect of interest rate fluctuation on its variable rate bonds. All swaps are recognized on the consolidated balance sheets at their fair value in accordance with current accounting guidance. Changes in the fair value of interest rate swaps are included in excess of revenues over expenses. The net cash payments or receipts under the interest rate swap agreements have been recorded as an increase (decrease) to interest expense. Excess of Revenues over Expenses The consolidated statements of operations include excess of revenues over expenses. Changes in unrestricted net assets which are excluded from excess of revenues over expenses, include transfers of assets to and from affiliates for other than goods and services, change in unrealized gains and losses on marketable investments, contributions of long-lived assets (including assets acquired using contributions which by donor restriction were to be used for the purposes of acquiring such assets), changes in pension and postretirement liability and other changes related to noncontrolling interests. Net Patient Service Revenue Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payers including Medicare and Medi-Cal, and others for services rendered, including estimated retroactive audit adjustments under reimbursement agreements with third-party payers. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods, as final settlements are determined. Contracts, laws and regulations governing the Medicare and Medi-Cal programs are complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates may change by a material amount in the near term. 9 Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars) 2. Summary of Significant Accounting Policies (Continued) Net Patient Service Revenue (continued) The provision for doubtful accounts is based upon management's assessment of expected net collections considering historical experience and other collection indicators. Throughout the year, management assesses the adequacy of the allowance for uncollectible accounts based upon historical write-off experience. The results of this review are then used to make any modifications to the provision for doubtful accounts to establish an appropriate allowance for uncollectible accounts. Charity Care SHC provides either full or partial charity care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. Amounts determined to qualify as charity care are not reported as net patient service revenue. SHC also provides services to other indigent patients under Medi-Cal and other publicly sponsored programs, which reimburse at amounts less than the cost of the services provided to the recipients. The difference between the cost of services provided to these indigent persons and the expected reimbursement is included in the estimated cost of charity care. Premium Revenue UHA has capitated agreements with various health maintenance organizations (\"HMOs\") to provide medical services to enrollees. Under these agreements, monthly payments are received based on the number of health plan enrollees. These receipts are recorded as premium revenue in the consolidated statements of operations and changes in net assets. Costs are accrued when services are rendered under these contracts, including cost estimates of incurred but not reported (\"IBNR\") claims. The IBNR accrual (which is included in accounts payable and accrued liabilities in the consolidated balance sheets) includes an estimate of the costs of services for which UHA is responsible, including referrals to outside healthcare providers. Income Taxes SHC and UHA are not-for-profit corporations and tax-exempt pursuant to Section 501(c)(3) of the Internal Revenue Code. SEROC, CareCounsel and SHI are limited liability companies and taxable income flows through to the individual members. SUMIT is currently exempt from all taxes until March 31, 2035. SRA is a limited liability company, but has elected to be taxed as a corporation. PEAC is a taxable corporation. SHC has no uncertain tax positions pertaining to unrelated business income. 10 Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars) 2. Summary of Significant Accounting Policies (Continued) Self-Insurance Plans SHC self-insures for professional liability risks, postretirement medical benefits, workers' compensation and health and dental benefits. These liabilities are reflected as self-insurance reserves in the consolidated balance sheets. Professional Liability SHC is self-insured through SUMIT for medical malpractice and general liability losses under claims-made coverage. SHC also maintains professional liability reserves for claims not covered by SUMIT which totals $4,850. Since September 1, 2005, SUMIT has retained 100% of the risk related to the first $15,000 per occurrence. The next $115,000 is transferred to various reinsurance companies. Prior to September 1, 2005, SHC maintained various coverage limits. Postretirement Medical Benefits Liabilities for post-retirement medical claims for current and retired employees are actuarially determined. Workers' Compensation SHC purchases insurance for workers' compensation claims with a $750 deductible per occurrence. Workers' compensation insurance provides statutory limits for the State of California. An actuarial estimate of retained losses (or losses retained within the deductible) has been used to record a liability. Health and Dental Liabilities for health and dental claims for current employees are based on estimated costs. Fair Value of Financial Instruments Due to the short-term nature of cash and cash equivalents, accounts payable and accrued liabilities, and accrued salaries and related benefits, their carrying value approximates their fair value. The fair value of the amounts payable under third-party reimbursement contracts is not readily determinable. The fair value of long-term debt is estimated based on quoted market prices for the bonds or similar financial instruments. Concentration of Credit Risk Financial instruments, which potentially subject SHC to concentrations of credit risk, consist principally of cash and cash equivalents, patient accounts receivable, and investments in University managed pools. SHC's concentration of credit risk relating to patient accounts receivable is limited by the diversity and number of patients and payers. Patient accounts receivable consist of amounts due from commercial insurance companies, governmental programs, private pay patients and other thirdparty payers. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to patient accounts receivable allowances, amounts due to third party payers, retirement plan obligations, and self-insurance reserves. Actual results could differ from those estimates. Reclassification Certain reclassifications have been made to the 2013 notes to the consolidated financial statements to conform to the 2014 presentation. 11 Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars) 2. Summary of Significant Accounting Policies (Continued) Recent Pronouncements The Financial Accounting Standards Board (\"FASB\") Accounting Standards Codification (\"ASC\") is the sole source of authoritative non-governmental U.S. generally accepted accounting principles. In December 2011, the FASB issued an update to the ASC which expanded the required disclosures about offsetting and related arrangements of an entity's financial assets and liabilities. The disclosures are intended to provide additional information to assist financial statement users in understanding the effect of those arrangements on the entity's financial position. This guidance was effective for annual periods beginning on or after January 1, 2013 and did not impact SHC's financial statement disclosures. In July 2012, the FASB issued an update to the ASC that allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative impairment test on indefinite-lived intangible assets. This guidance was effective for fiscal periods beginning after September 15, 2012 and did not impact SHC's consolidated financial statements. In October 2012, the FASB issued an update to the ASC to improve consistency in practice about how to classify cash receipts arising from the sale of certain donated financial assets, such as securities, in the statement of cash flows. The guidance was effective for periods beginning after June 15, 2013 and did not materially impact SHC's consolidated financial statements. In May 2014, the FASB issued an update to the ASC to improve the consistency of revenue recognition practices across industries for economically similar transactions. The core principle is that an entity recognizes revenue for goods or services to customers in an amount that reflects the consideration it expects to receive in return. The guidance is effective for periods beginning after December 15, 2016. SHC is currently evaluating the impact that this guidance will have on its consolidated financial statements. 12 Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars) 3. Net Patient Service Revenue SHC has agreements with third-party payers that provide for payments at amounts different from SHC's established rates. A summary of payment arrangements with major third-party payers follows: Medicare Inpatient acute care services rendered to Medicare program beneficiaries are paid at prospectively determined rates per discharge. These rates vary according to a patient classification system that is based on clinical, diagnostic and other factors. Medicare reimburses hospitals for covered outpatient services rendered to its beneficiaries by way of an outpatient prospective payment system based on ambulatory payment classifications. SHC's classification of patients under the Medicare program and the appropriateness of their admission are subject to an independent review. Inpatient non-acute services, certain outpatient services and medical education costs related to Medicare beneficiaries are paid based, in part, on a cost reimbursement methodology. SHC is reimbursed for cost reimbursable items at a tentative rate with final settlement of such items determined after submission of annual cost reports and audits thereof by the Medicare fiscal intermediary. The estimated amounts due to or from the program are reviewed and adjusted annually based on the status of such audits and any subsequent appeals. Differences between final settlements and amounts accrued in previous years are reported as adjustments to net patient service revenue in the year examination is substantially completed. SHC's Medicare cost reports have been audited by the Medicare fiscal intermediary through August 31, 2005. Professional services are reimbursed based on a fee schedule. Medi-Cal Inpatient services rendered to Medi-Cal program beneficiaries are reimbursed under a contract at a prospectively determined negotiated per diem rate. Outpatient services are reimbursed based upon prospectively determined fee schedules. Professional services are reimbursed based on a fee schedule. Managed Care Organizations SHC has entered into agreements with numerous nongovernment third-party payers to provide patient care to beneficiaries under a variety of payment arrangements. These include arrangements with: Commercial insurance companies, including workers' compensation plans, which reimburse SHC at negotiated charges. Managed care contracts such as those with HMOs and PPOs, which reimburse SHC at contracted or per diem rates, which are usually less than full charges. Counties in the State of California, which reimburse SHC for certain indigent patients covered under county contracts. Uninsured For uninsured patients that do not qualify for charity care, SHC recognizes revenue on the basis of its standard rates for services less an uninsured discount applied to the patient's account that approximates the average discount for managed care payers. 13 Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars) 3. Net Patient Service Revenue (Continued) Patient service revenue, net of contractual allowances (but before provision for doubtful accounts), by major payor for the years ended August 31 is as follows: 2014 Medicare Medi-Cal Managed Care - Discounted Fee for Services Self pay and other Related party 2013 $ 564,361 48,453 2,077,301 246,277 43,675 $ 514,500 74,251 1,832,118 216,180 42,316 Patient service revenue, net of contractual allowances Provision for doubtful accounts $ 2,980,067 (140,678) $ 2,679,365 (115,762) Net patient service revenue $ 2,839,389 $ 2,563,603 SHC recognized net patient service revenue adjustments of $1,341 and $1,399 as a result of prior years favorable and unfavorable developments related to reimbursement for the years ended August 31, 2014 and 2013, respectively. SHC also recognized revenues of $21 and $10,049 as a result of prior years appeals settled during the years ended August 31, 2014 and 2013, respectively. Amounts due from Blue Cross, Medicare, and Blue Shield as a percentage of net patient accounts receivable at August 31 are as follows: 2014 Blue Cross Medicare Blue Shield 2013 18% 13% 14% 21% 14% 13% SHC does not believe significant credit risks exist with these payers. California Hospital Quality Assurance Fee Program The State of California enacted legislation in 2009 which established a Hospital Quality Assurance Fee (\"QAF\") Program and a Hospital Fee Program. These programs imposed a provider fee on certain California general acute care hospitals that, combined with federal matching funds, would be used to provide supplemental payments to certain hospitals and support the State's effort to maintain health care coverage for children. The effective period of this Hospital Fee Program was April 1, 2009 through December 31, 2010. The State received final approval from the Centers for Medicare & Medicaid Services (\"CMS\") in December of 2010 on the rates. Subsequent legislation extended the QAF and Hospital Fee programs from January 1, 2011 through June 30, 2011, which was approved by CMS in December 2011. Additional legislation extended the QAF and Hospital Fee programs from July 1, 2011 through December 31, 2013. In June 2012, CMS approved the fee-for-service Medi-Cal supplement payments portion of this thirty month extension. In June 2013, CMS approved twenty four months of the managed care supplemental payments portion of this thirty month extension. SHC recognized $9,543 and $50,090 in net patient service revenue under these programs and $7,581 and $28,730 in other expense for QAF to the California Department of Health Care Services for the years ended August 31, 2014 and 2013, respectively. 14 Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars) 4. Charity Care and Uncompensated Costs SHC engages in numerous community benefit programs and services. These services include health research, education and training and other benefits for the larger communities that are excluded from the information below. Uncompensated charity care is provided to vulnerable populations. Additionally, Medi-Cal and Medicare program reimbursements do not cover the estimated costs of services provided. Information related to SHC's charity care for the years ended August 31 is as follows: 2014 2013 Charity care at established rates $ 63,789 $ 81,077 Estimated cost of charity care, net $ 14,792 $ 19,595 The estimated cost of providing charity care is based on a calculation which applies a ratio of costs to charges to the gross uncompensated charges associated with providing care to charity patients. The ratio of cost to charges is calculated based on SHC's total expenses divided by gross patient service charges. SHC received $684 and $652 during the years ended August 31, 2014 and 2013, respectively, from contributions that were restricted for the care of indigent patients. Estimated cost of services in excess of reimbursement for the years ended August 31 is as follows: 2014 Charity care Medi-Cal Medicare Total 5. 2013 $ 14,792 148,896 327,355 $ 19,595 116,504 272,638 $ 491,043 $ 408,737 The American Recovery and Reinvestment Act of 2009 The American Recovery and Reinvestment Act of 2009 (\"ARRA\") increased domestic spending on education, infrastructure and health care, including up to $31 billion in new spending on health information technology, most of which is for incentive payments to physicians and hospitals through the Medicare and Medicaid (\"Medi-Cal\") programs. On July 13, 2010, CMS issued two final rules related to the adoption and dissemination of electronic health records (\"EHRs\"). One of the rules defines the \"meaningful use\" requirements that hospitals and other providers must meet to qualify for federal incentive payments for adopting certified EHRs under ARRA, and the other final rule describes the technical capabilities required for certified EHR technology. The Medi-Cal Electronic Health Record Incentive Program provides incentive payments to eligible hospitals, physicians and certain other professionals (\"Providers\") as they adopt, implement, or upgrade certified EHR technology in their first year of participation and demonstrate meaningful use for up to five remaining participation years. Medi-Cal EHR incentive payments to Providers are paid through the California Department of Health Care Services (\"DHCS\"), but are 100% federally funded. 15 Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars) 5. The American Recovery and Reinvestment Act of 2009 (Continued) The Medicare incentive payments to individual hospitals are made over a four-year, frontweighted period. Hospitals that fail to become meaningful users of EHRs (and fail to submit quality data) by 2015 will be subject to penalties in the form of a reduction in Medicare payments. The Medi-Cal incentives are also received in four front-weighted annual payments, but are subject to more flexible payment and compliance standards than Medicare incentive payments. There are no Medi-Cal payment adjustments related to the failure to comply with meaningful use requirements. SHC recognized $5,458 and $7,665 of EHR incentives in other revenue for the years ended August 31, 2014 and 2013, respectively, related to the Medi-Cal EHR incentive program. 6. Contributions Receivable Current and long-term portions of contributions receivable are included in other receivables and other assets in the consolidated balance sheets, respectively, and contribution revenue is included in the financial statements in the appropriate net asset category. Contributions are recorded at the discounted net present value of the future cash flows, adjusted for the risk of donor default, using a discount rate of 2.01% for new receivables recorded in 2014 and ranging from 1.20% to 3.62% for receivables recorded in 2013. Contributions receivable at August 31 are expected to be realized in the following periods: 2014 In one year or less Between one year and five years More than five years $ Less: discount/allowance Total contributions receivable, net Less: current portion Contributions receivable, net of current portion $ 16,220 224,669 25,348 2013 $ 19,744 217,922 88,160 266,237 325,826 (26,338) (32,366) 239,899 293,460 (15,183) (18,834) 224,716 $ 274,626 Contributions receivable at August 31 are to be utilized for the following purposes: 2014 Plant replacement and expansion Indigent care and other Total $ 262,156 4,081 $ 320,442 5,384 $ 266,237 $ 325,826 There were no conditional pledges at August 31, 2014 and 2013. 16 2013 Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars) 7. Investments and Investments in University Managed Pools The composition of investments held directly by SHC at August 31 is as follows: 2014 Short Term Investments: Mutual funds Investments: Cash and cash equivalents Mutual funds Other Total 2013 Cost Fair Value $ 100,840 $ 100,970 $ 50,141 $ 49,636 $ $ $ 78,607 45,783 - $ 78,607 46,773 - 56,826 57,167 5,826 $ 119,819 56,826 58,214 5,826 $ 120,866 Cost $ 124,390 Fair Value $ 125,380 The composition of investments in University managed pools at August 31 is as follows: Fair Value Investments in University managed pools: Bonds and Merged Pool mutual funds Securities Cash and short Expendable Funds termPool investments Total 2014 2013 $ 1,354,539 23,891 4,955 $ 1,177,287 4,608 $ 1,383,385 $ 1,181,895 The Merged Pool (\"MP\") is the primary investment pool in which funds are invested. The MP is invested with the objective of maximizing long-term total return. It is a unitized pool in which the fund holders purchase investments and withdraw funds based on a monthly share value. The MP's investments at August 31, 2014 and 2013 consist of approximately 7% and 5% cash and cash equivalents, 5% and 5% fixed income, 26% and 23% public equity securities, 9% and 10% real estate, 8% and 8% natural resources, 21% and 25% absolute returns, and 24% and 24% private equity securities, respectively. The securities were donated in August 2014 and recorded at fair market value as of August 31, 2014. The University plans to sell the securities and invest the funds in the MP during fiscal year 2015. 8. Fair Value Measurements Current accounting guidance defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk. 17 Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars) 8. Fair Value Measurements (Continued) In addition to defining fair value, this guidance expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which are determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are: Level 1: Quoted prices are available in active markets for identical assets or liabilities as of the measurement date. Financial assets and liabilities in Level 1 include U.S. Treasury securities and listed equities. Level 2: Pricing inputs are based on quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in inactive markets, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Financial assets and liabilities in this category generally include asset-backed securities, corporate bonds and loans, municipal bonds and interest rate swap instruments. Level 3: Pricing inputs are generally unobservable for the assets or liabilities and include situations where there is little, if any, market activity for the investment. The inputs into the determination of the fair value require management's judgment or estimation of assumptions that market participants would use in pricing the assets or liabilities. The fair values are therefore determined using factors that involve considerable judgment and interpretations, including but not limited to private and public comparables, third party appraisals, discounted cash flow models, and fund manager estimates. 18 Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars) 8. Fair Value Measurements (Continued) The following table summarizes SHC's assets and liabilities measured at fair value on a recurring basis as of August 31, based on the inputs used to value them: 2014 Level 1 Assets Cash and cash equivalents Short term investments Assets limited as to use, held by trustee Investments Investments in University managed pools Total assets Liabilities Interest rate swap instruments Level 2 Level 3 Total $ 467,655 491,594 56,826 23,891 $ 100,970 58,214 1,359,494 $ 5,826 - $ 467,655 100,970 491,594 120,866 1,383,385 $1,039,966 $1,518,678 $ 5,826 $ 2,564,470 $ $ 155,984 $ - $ 155,984 - 2013 Level 1 Assets Cash and cash equivalents Short term investments Assets limited as to use, held by trustee Investments Investments in University managed pools Total assets Liabilities Interest rate swap instruments Level 2 Level 3 Total $ 448,831 531,444 78,607 - $ 49,636 46,773 1,181,895 $ - $ 448,831 49,636 531,444 125,380 1,181,895 $1,058,882 $1,278,304 $ - $ 2,337,186 $ $ 133,255 $ - $ 133,255 - The table below sets forth a summary of the changes in the fair value of the level 3 investments for the year ended August 31: Balance, beginning of year Purchases $ 2014 5,826 Balance, end of year $ 5,826 19 Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars) 9. Property and Equipment Property and equipment consist of the following as of August 31: 2014 Land and improvements Buildings and improvements Equipment $ 28,177 1,020,692 766,221 2013 $ 1,815,090 (1,082,021) 672,793 Less: Accumulated depreciation Construction-in-progress Property and equipment, net $ 1,405,862 28,196 926,512 718,682 1,673,390 (984,931) 455,019 $ 1,143,478 Depreciation and amortization expense totaled $100,625 and $94,080 for the years ending August 31, 2014 and 2013, respectively, and is included in the consolidated statements of operations and changes in net assets. As of August 31, 2014, medical equipment acquired under capital leases totaled $6,472 and is included in property and equipment in the consolidated balance sheets. Amortization expense under capital leases is included in depreciation expense in the consolidated statements of operations and changes in net assets. Accumulated amortization was $6,472 and $6,413 as of August 31, 2014 and 2013, respectively. Interest expense on debt issued for construction projects and income earned on the funds held pending use are capitalized until the projects are placed in service and depreciated over the estimated useful life of the asset. Capitalized interest expense net of capitalized investment income was $19,084 and $18,758 for the years ended August 31, 2014 and 2013, respectively. 20 Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars) 10. Long-Term Debt SHC's outstanding debt at August 31 is summarized below: Year of Maturity Interest Rates 2014/2013 Outstanding Principal 2014 2013 2008 Series A1 Refunding Revenue Bonds 2040 2.25% to 5.15% 2008 Series A2 Refunding Revenue Bonds 2040 1.00% to 5.25% 101,750 102,775 2008 Series A3 Refunding Revenue Bonds 2040 1.00% to 5.50% 82,240 83,065 2010 Series A Refunding Revenue Bonds 2031 4.00% to 5.75% 135,305 140,200 2010 Series B Refunding Revenue Bonds 2036 4.50% to 5.75% 146,710 146,710 2012 Series A Revenue Bonds 2051 5.00% 340,000 340,000 2012 Series B Refunding Revenue Bonds 2023 2.00% to 5.00% 58,520 63,555 Promissory note 2014 7.03% - 2008 Series B Refunding Revenue Bonds 2045 0.08%/0.11% 168,200 168,200 2012 Series C Revenue Bonds 2051 0.13%/0.14% 60,000 60,000 2012 Series D Revenue Bonds 2051 0.71%/0.74% 100,000 100,000 1,261,510 1,274,164 Unamortized original issue premiums/discounts, net 46,189 48,972 Current portion of long-term debt (11,700) (12,654) (228,200) (228,200) $ 1,067,799 $ 1,082,282 Fixed Rate Obligations $ 68,785 $ 69,485 174 Variable Rate Obligations Total principal amounts Debt subject to short-term remarketing arrangements Long-term portion, net of current portion 21 Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars) 10. Long-Term Debt (Continued) In June 2008, the California Health Facilities Financing Authority (\"CHFFA\"), on behalf of SHC, issued Variable Rate Demand Bonds (\"VRDB's\") in the aggregate principal amount of $428,500 (the \"2008 Bonds\") to refund its previously issued 2006 Bonds. The 2008 Bonds were comprised of $260,300 of 2008 Series A VRDB's that were issued as Series A-1, Series A-2, and Series A3; and $168,200 of 2008 Series B VRDB's that were issued as Series B-1 and Series B-2. In June 2009, SHC remarketed the 2008 Series A-1 bonds in the aggregate principal amount of $70,500. In June 2010, SHC converted the 2008 Series A-1 bonds from an annual put mode to a long-term fixed interest rate mode. The remarketing of the 2008 Series A-1 bonds generated an original issue premium of approximately $140; that, pursuant to the requirements of the underlying documents, was used to reduce the principal amount of the bonds from $70,500 to $70,360. In June 2010, CHFFA, on behalf of SHC, issued fixed rate revenue bonds in the aggregate principal amount of $296,055 (the \"2010 Bonds\"). The 2010 Bonds were comprised of $149,345 of 2010 Series A bonds, proceeds of which were used to refund the 1998B bonds, and $146,710 of 2010 Series B bonds, proceeds of which were used to refund the 2003 Series B, C and D bonds. In June 2011, SHC remarketed the 2008 Series A-2, A-3 and B-2 bonds in the aggregate principal amount of $272,365. SHC converted the 2008 Series A-2 bonds from a weekly interest rate mode and the 2008 Series A-3 bonds from a multi-annual put mode to a long-term fixed interest rate mode. The remarketing of the 2008 Series A-3 bonds generated an original issue premium of approximately $1,535; that, pursuant to the requirements of the underlying documents, was used to reduce the principal amount of the bonds from $85,700 to $84,165. SHC converted the 2008 Series B-2 bonds from a weekly interest rate mode to a commercial paper mode. As a part of the conversion, the 2008 Series B-2 bonds were split into two subseries in the amount of $42,050 each. Bonds in a commercial paper mode are remarketed for various periods that can be no longer than 270 days and are established at the beginning of each commercial paper rate period. Bondholders in a commercial paper mode have the option to tender their bonds only at the end of the commercial paper rate period. In May 2012, CHFFA, on behalf of SHC, issued four series of revenue bonds in the aggregate principal amount of $568,320 (the \"2012 Bonds\"). The 2012 Bonds were comprised of $340,000 of 2012 Series A bonds, $68,320 of Series B bonds, $60,000 of Series C bonds and $100,000 of Series D bonds. Proceeds of the 2012 Series A, C and D bonds will be used to finance a portion of the new Stanford Hospital. Proceeds of the 2012 Series B bonds were used to advance refund the 2003 Series A bonds. The 2008 Series B-1 bonds are in a weekly interest rate mode and are remarketed every 7 days at the then prevailing interest rate. Bondholders in a weekly interest rate mode have the option of tendering their bonds on a weekly basis. The 2012 Series C bonds are in a Windows weekly floating index mode and cannot be tendered for 180 days after a 30 day notice and remarketing period. The 2008 Series B bonds and the 2012 Series C bonds are supported by SHC's selfliquidity and are classified as current liabilities. The 2012 Series D bonds are also in a floating index mode with monthly interest rate resets and were directly placed with U.S. Bank. The 2012 Series D bonds are not subject to remarketing or tender until May 23, 2019 and are classified as long-term liabilities. 22 Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars) 10. Long-Term Debt (Continued) The 2012 Bonds, together with the 2010 Bonds and 2008 Bonds are collectively referred to as the \"Revenue Bonds\". The Revenue Bonds are limited obligations of CHFFA and are payable solely from payments made by SHC. Payments of principal and interest on the Revenue Bonds are collateralized by a pledge against the revenues of SHC secured under a master trust indenture between SHC and the master trustee. The master trust indenture includes, among other things, limitations on additional indebtedness, liens on property, restrictions on the disposition or transfer of assets, and maintenance of certain financial ratios. SHC may redeem the Revenue Bonds, in whole or in part, prior to the stated maturities. Total debt outstanding under the master trust indenture is in the aggregate principal amounts of $1,261,510 and $1,273,990 as of August 31, 2014 and 2013, respectively. Scheduled principal payments on long-term debt including unsecured promissory notes are summarized below: Scheduled Maturities 2015 2016 2017 2018 2019 Thereafter Bonds Supported by SHC Liquidity Total $ 11,700 13,255 13,240 13,335 14,505 967,275 $ 228,200 - $ 239,900 13,255 13,240 13,335 14,505 967,275 $ 1,033,310 $ 228,200 $ 1,261,510 The scheduled principal payments above represent the annual payments required under debt repayment schedules. The current portion of long-term obligations, including debt subject to short term remarketing arrangements, includes payments scheduled to be made in 2015 and the VRDB's supported by SHC's liquidity. The VRDB's supported by self-liquidity provide the bondholder with an option to tender the bonds to SHC. Generally accepted accounting principles require that bonds supported by SHC's liquidity be classified as current liabilities. The estimated fair value of the Revenue Bonds as of August 31, 2014 and 2013 was $1,371,231 and $1,285,951, respectively, and is considered level 2 based on the inputs used to value the Revenue Bonds as defined in Note 8. In 1998, SHC advance refunded its 1993 bonds in the amount of $89,520 by issuing the 1998 Series B bonds. In 2012, SHC advance refunded its 2003 Series A bonds in the amount of $74,110 by issuing the 2012 Series B bonds. As of August 31, 2014 and 2013, $27,295 and $96,200, respectively, of advance refunded bonds, which are considered extinguished, remain outstanding. Interest Rate Swap Agreements SHC has entered into various interest rate swap agreements (\"swap agreements\") with varying maturities through November 2051. SHC uses swap agreements, also known as risk management or derivative instruments, principally to manage interest rate risk and has entered into derivatives to lock in fixed rates for anticipated issuance and refunding of debt. By using swap agreements to manage the risk of changes in interest rates, SHC exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the swap agreements. When the fair value of a swap agreement is positive, the counterparty owes SHC, which creates credit risk. When the fair value of a swap agreement is negative, SHC owes the counterparty and, therefore, it does not possess credit risk. 23 Stanford Health Care Notes to Consolidated Financial Statements (in thousands of dollars) 10. Long-Term Debt (Continued) Interest Rate Swap Agreements (continued) SHC minimizes its credit risk by entering into swap agreements with at least two counterparties and requiring the counterparty to post collateral for the benefit of SHC based on the credit rating of the counterparty and the fair value of the swap agreement. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. The market risk associated with interest rate changes is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. SHC maintains interest rate swap programs on certain of its variable rate revenue bonds. These bonds expose SHC to variability in interest payments due to changes in interest rates. Management believes that it is prudent to limit the variability of its interest payments. To meet this objective and to take advantage of low interest rates, SHC entered into various interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk. Certain of these agreements involve the exchange of fixed rate payments for variable rate payments based on a percentage of the One Month London Interbank Offered Rate (\"LIBOR\"). In November 2012, SHC amended the terms of the 2008 Series A-2 and A-3 swap agreements to suspend cash flows until November 15, 2016. In conjunction with this amendment, SHC moved one of the swap agreements to a new counterparty. In February 2014, SHC terminated the 2008 B-1 and B2 swap agreements. As a result of the termination, a loss of $71 was included in loss on extinguish